Are you looking to purchase a home, but unsure of how much you need as a deposit?
Every lender has different requirements.
Whilst no-deposit home loans are largely unavailable; there are many options for people who do not have much in savings, such as using a guarantor loan.
How Much Do I Need To Save?
Generally, borrowers require 20% of the purchase price as a deposit, but it can be as low as 5% – or even less – if you qualify.
Here are some examples of what a minimum deposit of 5% of the property value looks like:
|Property purchase price||Minimum deposit|
You will need additional money to cover your purchasing costs, such as stamp duty and conveyancing, which usually add up to an additional 5% of the purchase price. Slightly less may be required if you are receiving first home benefits which reduce your stamp duty.
If you are an investor, you will ideally need 10% of the purchase price as a deposit and additional money to cover your purchasing costs. You may be eligible for a smaller deposit size depending on the strength of your situation.
You could also borrow up to 100% of the property value using the equity in another property, or even borrow 105% LVR (Loan-to-Value Ratio) through a guarantor loan. If you qualify for one of these two options, you could save thousands of dollars in deposit and Lenders Mortgage Insurance (LMI) fees.
Why Do I Need A Deposit?
Having a deposit shows the lender it is taking less risk in lending you money to buy a property.
Many lenders require the deposit to be the result of genuine savings, meaning it has been accumulated through regular contributions you have made to a savings account over at least three months.
Although there are exceptions to this requirement (which you can read on the genuine savings page), a deposit that you’ve saved yourself proves to the bank that you have the ability to make regular savings contributions and, therefore, make your repayments if your home loan is approved.
Note that if you do make a big deposit, you will substantially reduce the Loan-To-Value ratio of your loan, which will make you eligible for the best possible deals. But waiting to save up that extra cash may not always be the best option for you.
What Are The Costs Of Buying A Property?
Apart from your deposit, some additional costs that you’ll need to meet include fees for conveyancing, inspections (including pest and building), home building insurance, title search and loan application.
Without a 20% deposit, the biggest cost you’ll be hit with is LMI.
You can estimate the costs of buying a property in your state by using our home purchasing costs calculator.
This calculator will take into account the stamp duty and first-home buyer benefits that you may receive.
You can also read a complete breakdown of these costs with this easy cost guide.
Does The Source Of My Deposit Matter?
Each lender has its own policy about the sources of a deposit. As discussed above, even if you have enough funds, you may find yourself unable to obtain a loan because you don’t meet genuine savings requirements.
There are a number of other things that can make up your deposit, including:
- Your own savings or term deposit
- Monetary gifts
- Tax refunds
- Sales of assets such as shares
- First Home Owners Grant and other first home buyer incentives
- First Home Saver Accounts
Don’t forget to keep on hand at least 5% of the purchase price of the house to cover fees and charges associated with buying a property.
Will I Need Genuine Savings?
In most cases, your deposit will need to be partly made up of genuine savings. This means money that you have saved up yourself over time.
Most banks like to see that you have saved this money over a period of at least three months in order to meet the genuine savings requirement.
Different lenders have varying criteria for genuine savings. Some will waive this requirement if you have been renting and have a perfect record of paying rent on time; however, others are much more strict with their lending policy.
Please refer to our page on genuine savings for more information.
Your savings pattern is important because it demonstrates to the bank that you have the ability to meet your loan repayments.
If you can show that you are putting a few hundred dollars a week towards savings, it looks better than someone who puts a few lump-sum payments in every few weeks. This kind of sporadic saving is viewed by some lenders as a higher risk.
The Advantages Of A Big Deposit
The more you can put down as a deposit, the less you’ll have to borrow, which means you’ll pay less in interest over the life of the loan.hUse the loan repayment calculator to find out how much you can save with a decent deposit.
With a 20% or more deposit, you’ll also have a range of lenders to choose from.
- 10% deposit: If you can increase the size of your deposit from 5% to 10%, you’ll be offered a lower interest rate, and you’ll have more power to negotiate for further discounts such as the waiver of the annual fee for the first year of your mortgage (for strong applications).
That’s because your loan will be accepted by more lenders which gives you a wider range of home loan packages to choose from.
- 20% deposit: You can avoid LMI and save thousands of dollars in upfront costs.
Here some examples of how big of a deposit you’ll need to avoid LMI:
|Property purchase price||Minimum deposit to avoid LMI|
How Can I Use My Equity?
Equity is the portion of the value of a property that you own. It is the value of an asset minus the debt still owed on it. For example, if you have a home worth $500,000 and you owe $300,000 on it, then you have $200,000 in equity.
If someone already owns a property and wants to buy a second property, they can use the equity on their existing home instead of using their savings.
The property owner may be eligible to get a home loan for 80% to 90% of the value of their current property.
Obviously, if you have a loan against that original property, then you will have to use whatever you take out to pay out that original loan first.
Whatever you have remaining can be used as a deposit for the property you wish to purchase. Your home loan in this situation will depend on your income and other factors. Genuine savings is often not required if you own a property already.
Lenders will also take into account any negative gearing you may have on the original property when calculating how much you can borrow.
What If I Don’t Have A Deposit?
It’s no longer possible to borrow 100% of the property value, but with a guarantor, you can borrow the full amount plus the costs of completing the purchase.
How does it work?
Well, if your parents have enough equity in their home, they can use their property as security for your mortgage guarantor arrangement works by having your parents use their property as security for your mortgage.
Apart from not needing a deposit, you’ll be able to avoid the cost of Lenders Mortgage Insurance (LMI), a costly insurance premium that you’ll need to pay upfront when your loan is advanced.
Check out the guarantor home loan page to find out more about how it works and the eligibility requirements.
Tips For Saving A Deposit
Saving a good deposit can be tough in today’s market, but there’s some tried and tested techniques that you can follow to build your savings:
- Have an end goal: This not only includes a long term goal but short and medium-term goals as well. Regularly reviewing your progress is essential.
- Have a plan and a timeframe in mind: Work out how much you can realistically save on a regular basis and, based on that, have a time frame to reach your savings goal.
- Save more, progressively: Start off your savings small and then increase it gradually. It lessens the sting or at least tricks your brain into thinking that saving the deposit isn’t such a huge cost.
For more easy tips, check out the ‘8 Things That Will Trick You Into Saving’ infographic.
Speak To Our Experts!
Our mortgage brokers can help you figure out how much you need put towards a home deposit and whether you will satisfy the genuine savings requirement. Please call us on 1300 889 743 or enquire online and one of our mortgage brokers will contact you discuss your situation.